RETHINKING

INDUSTRIAL POLICY
bruegelpolicybrief
ISSUE2011/04
JUNE 2011
by Philippe Aghion
Harvard University and Bruegel
paghion@fas.harvard.edu
Julian Boulanger
Universit Catholique de Louvain
julian.boulanger@bruegel.org
and Elie Cohen
CNRS-Sciences-Po
elie.cohen@sciences-po.fr
POLICY CHALLENGE
Our new evidence on the effectiveness of government intervention should
lead policymakers to revisit industrial policy. If the EU is to grow and com-
pete globally, there is a case for the European Commission to allow national
or EU sectoral aid, if it is appropriately designed and governed to encourage
the redirection of innovation and
production. Horizontal support
and sectoral aid for upstream
research and development are
on their own not sufficient to
foster the transformation of the
European economy. A robust
competition policy remains
essential to avoid rent-seeking
and to favour entry. But it should
go hand in hand with greater
government economic activism.
0
20
40
60
80
100
120
140
160
1992 1994 1996 1998 2000 2002 2004 2006 2008
Aid as % of GDP (1992 = 100)
Total state aid excl. railways
Total state aid to
manufacturing/services
Total sectoral state aid
State aids trends in the EU15
THE ISSUE Industrial policy has a bad name: picking winners and thus dis-
torting competition, while exposing government to capture by vested
interests. But there are reasons for a rethink. First, climate change: without
government intervention to jump-start massive private investment in clean
technologies, governments, by default, encourage investment in dirtier
technologies. Second, a new post-crisis realism: laissez-faire complacency
by many governments has led to mis-investment in the non-tradable sector
at the expense of growth-rich tradables. Third, China and some other
emerging economies are big deployers of growth-enhancing sectoral poli-
cies. The challenge for Europe is how it can design and govern sectoral
policies that are competition-friendly and thus growth-enhancing.
Source: Bruegel based on DG Competition State Aid Scoreboard.
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RETHINKING INDUSTRIAL POLICY
1. See, for example,
Susanne Bergers inter-
vention at the
conference Les Etats
Generaux de la France,
Paris, December 2010.
SINCE THE 1980s, industrial
policy government grants of
subsidies, concessional credit,
privileged access to public ten-
ders or trade protection targeted
at particular firms or industries
has fallen into disrepute among
academics and policy advisers.
The main argument against it is
that it prevents competition and
allows governments to pick win-
ners (and, more rarely, to name
losers) in a discretionary fash-
ion, thereby increasing the scope
for capture of governments by
vested interests.
However, three globally signifi-
cant factors have recently gained
importance, inviting a rethink of
the issue:
First: climate change and the
increasing awareness that
without government interven-
tion to encourage clean
production and clean innova-
tion, global warming will
intensify and generate nega-
tive externalities (drought,
deforestation, migration, con-
flict) worldwide.
Second: the recent financial
crisis, which revealed the
extent to which laissez-faire
policies had led several coun-
tries, in particular in southern
Europe, to allow the uncon-
trolled development of
non-tradable sectors (in par-
ticular real estate) at the
expense of tradable sectors
that are more conducive to
sustainable growth and com-
petitiveness. This experience
has resulted in an increasing
number of governments
departing from this laissez-
faire attitude.
Third: China, which has
become prominent on the
world economic stage and is a
keen practitioner of industrial
policy. Which role this policy
has played in its economic
success is a matter for discus-
sion. But the reality is that this
very success has wiped out
the stains from previous eco-
nomic failures and made
industrial policy legitimate
again. Many governments in
the world, especially in emerg-
ing and developing countries,
now want to emulate China.
Meanwhile, more scholars (par-
ticularly in the US) are also
denouncing the danger of lais-
sez-faire policies that lead
developed countries to spe-
cialise in upstream research and
development and in services,
while outsourcing manufacturing
to countries where unskilled
labour costs are
lower. These scholars
point to countries
such as Germany or
Japan, which have
better managed to
maintain intermediate manufac-
turing segments by pursuing
more active industrial policies.
This in turn has allowed them to
benefit more from outsourcing
the other, less human-capital
intensive segments
1
.
In this Policy Brief we argue that
the debate should no longer
revolve around the question of
whether sectoral policies are jus-
tified at all, but should rather be
about how such policies should
be designed and governed so
that they complement competi-
tion policy in fostering
innovation. In particular, sectoral
aid targeting green technologies,
or skill-intensive and competi-
tive sectors, and which is not
biased towards individual firms
within the sector, might help
achieve high and sustainable
levels of growth.
OLD ARGUMENTS REVISITED
The most recurrent argument
against industrial intervention-
ism is that it is 'picking winners'.
According to this, government is,
at best, ill-placed to assess
chances of commercial success
more effectively than the
market. At worst, government is
captured by the interests that
benefit from its intervention.
True, industrial policy is always
about 'picking winners' to some
extent, and this always involves
the risks of misjudgement and
capture.
A second criticism of
traditional industrial
policy is that it
involves a risk of cap-
ture and rent-seeking. There have
been many examples of costly
rent generation, not least the
failed import-substitution poli-
cies of developing countries in
the 1960s and 1970s. This is,
however, less an argument
against any type of intervention
at all than an argument for clear
principles for the selection of
sectors and for the governance
of support to these sectors.
There are also strong arguments
in favour of growth-enhancing
Global factors
invite a rethink of
industrial policy.
RETHINKING INDUSTRIAL POLICY
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2. An adequately tar-
geted policy is, in
principle, one that tar-
gets a particular
market failure (such as
knowledge externalities
or financial market
imperfections). Markets
that suffer from imper-
fect competition make
particularly interesting
cases: by subsidising
its domestic industries,
a government may give
a strategic advantage
to domestic firms and
allow them to gain
market share at the
expense of foreign com-
petitors. This approach,
suggested by Brander
and Spencer (1985),
suffers from serious
limitations, but could in
principle be used to
target key industries
by looking at their
structure. For a seminal
contribution, see
James A. Brander and
Barbara J. Spencer
(1985) Export subsi-
dies and international
market share rivalry,
Journal of International
Economics, vol. 18(1-
2), pp 83-100. For
further insights, see-
James A. Brander
(1995) Strategic trade
policy, Working Papers
5020, National Bureau
of Economic Research.
3. The data, from the
European Patent
Offices World Patent
Statistical Database, is
annual and covers 80
countries from 1978 to
sectoral policies. A major theoret-
ical argument is the existence of
knowledge spillovers across
companies, namely, when
choosing where to produce and
innovate, companies do not
internalise the positive or nega-
tive knowledge externalities
their choices might generate for
other companies and sectors.
A reinforcing factor is the exis-
tence of capital market
imperfections and credit con-
straints, which may further limit
or slow down the reallocation of
firms towards new (more
growth-enhancing) sectors.
When capital markets function
efficiently they contribute effec-
tively to the allocation of
investment to new sectors, as
demonstrated by the US experi-
ence with the ICT and biotech
sectors. But incomplete or under-
developed financial markets
hamper such reallocation, which
justifies state intervention.
On the empirical front, to our
knowledge the most convincing
study in support of properly
designed industrial policy is by
Nunn and Trefler (2010). They
measure if tariff protection is
biased in favour of activities and
sectors that use more highly
skilled workers, and find a signif-
icant positive correlation
between productivity growth and
the skill bias of tariff protection.
Moreover, they show that at least
25 percent of the correlation cor-
responds to a causal effect.
Overall, their analysis suggests
that adequately designed (here:
skill-intensive) targeting may
actually enhance growth, not
only in the sector that is being
subsidised, but also the country
as a whole. In the next section we
stress the importance of sectoral
policies that are not only ade-
quately targeted but also
properly governed
2
.
WHAT THE EVIDENCE SAYS
In this section we provide addi-
tional empirical support for
adequately targeted and properly
governed industrial policy. In
particular, while the traditional
view tends to see industrial
policy and competition policy as
being in opposition, we argue
that one can reconcile them. Fur-
thermore, we argue that they
should be regarded as comple-
mentary rather than, as
generally the case, substitutes.
In particular, we argue for inter-
vention targeted at areas in
which competition and innova-
tion play a key role, and for
intervention to be governed so
that it is both competition and
innovation friendly. We consider
five channels of sectoral inter-
vention and report on recent
research assessing the impact of
government policy. Each of these
instances can be read as illus-
trating the existence of
knowledge spillovers that are not
properly internalised by private
firms and sectors.
a Directed technical change:
the case of green innovation
The first argument is that the path
dependence of innovation, might
lead firms to innovate in the
wrong direction under laissez-
faire conditions. Clean innovation
is a case in point: because of
knowledge spillovers, in the
absence of intervention, innova-
tion tends to be biased towards
existing dirty technologies.
Aghion et al (2010a) explore a
cross-country panel data-set of
automotive industry patents to
establish 'clean-versus-dirty'
innovation path dependence
3
. In
their baseline empirical exercise,
they regress the ratio between
the current flows of clean-versus-
dirty patents on the fuel price,
the firm's stocks of (past) clean
and dirty patents, and interac-
tion terms between the fuel price
and patent stock variables. The
regressions control for country
and year fixed effects.
Table 1 shows the results: (i)
higher fuel prices encourage
firms to redirect innovation
towards clean patenting and (ii)
the firms propensity to pursue
clean innovation positively cor-
relates with their existing stock
of clean patents, and negatively
correlates with their existing
dirty patent stock. Thus, there is
indeed path-dependence in
clean-versus-dirty innovation.
Firms with a history of dirty inno-
vation tend to continue along the
Table 1: Redirecting technological
change
Variable
Fuel price (+)***
Stock of clean patents (+)***
Stock of dirty patents ()***
Source: Estimates from Aghion et al (2010a).
The sign of the coefficients is given in paren-
thesis. *** indicates significance at 1
percent, ** indicates significance at 5 per-
cent, * indicates significance at 10 percent.
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2007. The dataset
covers about 12000
patents in 'clean'
technologies (eg electric
vehicles, hybrid vehicles,
fuel cells) and about
36000 patents in 'dirty'
technologies related to
development of combus-
tion engines. The
database also reports
the names of patent
applicants and allows
clean and dirty patents
to be matched to patent
holders, each of which
has its own history of
clean-versus-dirty
patenting. One can thus
relate the current flows
of clean-versus-dirty
patenting to the stock of
clean-versus-dirty
patents accumulated by
the corresponding inno-
vator, to determine if
there is path-
dependence.
4. For a simple presenta-
tion, see Philippe Aghion
and Reinhilde Veugelers
(2009) 'No Green
Growth Without Innova-
tion', Policy Brief
2009/07, Bruegel.
5. See Raghuram G
Rajan and Luigi Zingales
(1998) Financial
dependence and
growth, American Eco-
nomic Review, vol.
88(3), pages 559-86,
and Matias Braun
(2002) Financial con-
tractibility and asset
hardness, working
paper.
RETHINKING INDUSTRIAL POLICY
same path, while firms with a
history of clean innovation tend
to continue to develop clean
technologies.
This path-dependence, combined
with the historical dominance of
dirty innovation, implies that in
the absence of government inter-
vention, economies will tilt
towards dirty innovation to a
socially suboptimal extent. In
particular Aghion et al (2010b)
show that the laissez-faire equi-
librium will typically lead to
environmental disasters, in
which environmental quality falls
below the level at which it can be
regenerated. Hence, there is a
role for government intervention
to redirect technological change
towards clean innovation.
This can be achieved through a
horizontal policy that allocates
carbon permits or taxes carbon
emissions. However, Aghion et al
(2010b) show that the eco-
nomic cost of the transition
towards clean development can
be reduced if public intervention
combines an across-the-board
carbon tax (or permits) with
direct clean-innovation subsi-
dies. In other words the targeted
approach that relies on two
instruments is superior to the
purely horizontal approach that
relies only on the carbon tax. At
least two instruments are
needed (carbon taxes and clean
R&D subsidies), rather than just
a carbon tax, because there are
two externalities to be dealt with:
the environmental externality and
the knowledge externality,
whereby firms that follow dirty
innovation paths do not inter-
nalise the effect this will have on
other firms innovation strategies
4
.
b Sectoral policy to
compensate for insufficient
financial development
A second rationale for sectoral
intervention is that even though
some sectors exhibit high growth
potential and, through the diffu-
sion on knowledge, display high
positive effects on the rest of the
economy, credit constraints may
limit capital inflows to these sec-
tors. In particular, high-tech
firms often show low levels of
asset tangibility, which in turn
makes access to credit more dif-
ficult
5
. Because their assets are
intangible, they cannot post the
collateral that would facilitate
access to credit. This effect is
likely to be stronger in more
financially primitive economies
where bank credit is the primary
channel of company financing.
Our conjecture is thus that sec-
toral policy supporting
innovation is likely to be more
growth-enhancing for the econ-
omy as a whole in less
financially developed countries.
To test this hypothesis, we look
at manufacturing and services
exports by EU15 countries from
1992-2008. We regress the over-
all share of exports of a country
in the sample to total EU15
exports (we call this variable
market share), on: (i) total sec-
toral state aid in that country to
industry and services, in mil-
lions (our variable SA); (ii)
financial development in the
country, measured by the ratio of
private credit by deposit-taking
banks and other financial inter-
mediaries to GDP (our variable
private); (iii) the interaction
between these variables. Table 2
shows the results. In particular,
the fifth row indicates that the
less financially developed a
country is, the more positively
correlated state aid is with its
overall market share in exports.
This confirms our conjecture that
in less financially developed
economies, state aid is more
effective in promoting exports.
Table 3 repeats the exercise, but
with patenting in the country as
the endogenous variable (our
variable 'patents'). Again, this is
consistent with the view that
sectoral state aid enhances
patenting more in less finan-
cially developed countries.
Our results confirm that the case
for sectoral intervention is
Table 2: State sectoral aid and credit
constraints
Log (market
share)
(1) (2)
Log(SA) 0.14*** 0.168***
(0.048) (0.049)
Log
2
(SA) -0.008*** -0.009***
(0.003) (0.003)
Log(Private) 0.135** 0.128*
(0.067) (0.067)
Log
2
(Private) 0.044*** 0.049***
(0.013) (0.014)
Log(SA)
*Log(Private)
-0.02** -0.016*
(0.009) (0.01)
Observations 213 213
Source: DG Competition State Aid Scoreboard,
OECD Structural Analysis (STAN) Databases
and Beck et al (2000), revised November
2010. Note: (1) Fixed effects regression,
without any controls. (2) Fixed effects
regression, controlling for time effects. In
both (1) and (2), a constant was included.
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6. More precisely, EU15
except Greece, Ireland
and Portugal due to
data availability.
RETHINKING INDUSTRIAL POLICY
case, each region will choose its
own 'champion', which in turn is
more likely to result in several
different firms getting the state
subsidies in the country in ques-
tion. Analyses reported in Tables
4 and 5 confirm this intuition.
Table 4 gives the results of
regressing the countries' export
shares on state aid, a proxy for
the extent to which state aid is
decentralised (our variable 'de-
cent'), and the interaction
between these two variables. Our
decentralisation variable is taken
as the ratio of subsidies to the
economic activity at local or
regional levels to the sum of
those subsidies from central,
regional and local government.
The sample is composed of 12 EU
countries over the period 1995-
2008
6
. Both market share in
Table 4 and 'patent' in Table 5 are
positively correlated with the
interaction term between state
aid and our proxy for decentrali-
sation of that aid. This in turn
suggests that the more decen-
tralised state aid is, the more
positive the effect of (sectoral)
state aid on a country's export
and innovation performance.
d Sectoral policy works better
when implemented in more
competitive sectors
Governments advocating indus-
trial policy often oppose
competition policy because it
prevents them from supporting
national champions. Arguments
between successive French gov-
ernments and the European
Commission illustrate this. Con-
versely, competition advocates
generally dismiss industrial
policy as ineffective. However,
sectoral policy should not be
systematically opposed to com-
petition policy. Aghion et al
(2010) argues that targeted
subsidies could be used to
induce several firms to operate in
the same sector, and that the
more competitive the sector, the
more these firms will be encour-
aged to innovate in order to
escape competition (Aghion et
al, 2005).
stronger when firms are more
credit-constrained. Indeed, credit
constraints prevent efficient
resource reallocation towards
activities with higher growth
potential, in particular activities
with high-potential spillovers to
the economy as a whole. This
implies that the case for indus-
trial policy is stronger in less
advanced economies, which are
also less developed financially,
whereas capital markets can be
expected to play a more signifi-
cant and effective allocation role
in more advanced economies.
c Sectoral policy works better
when more decentralised
An objection to these arguments
is that government intervention
may in fact be driven by political
economy rather than pure eco-
nomic considerations. However,
the objection that industrial
policy may result in the arbitrary
selection of a national champion
in the corresponding sector(s) is
presumably less applicable when
state aid is more decentralised,
the idea being that, in the worst
Table 3: State aid, credit constraints
and patenting
Patents
SA 0.041
(0.066)
Private -372.5759
(299.2163)
SA * Private -0.157*
(0.084)
Observations 199
Source: DG Competition State Aid Scoreboard,
OECD Patent Statistics and Beck et al (2000),
revised November 2010. Note: Fixed effects
regression, controlling for time effects and
BERD. A constant was included.
Table 5: Sectoral aid, decentralisa-
tion and patenting
Patents
SA -0.268***
(0.034)
Decent 703.4102
(1224.247)
SA * Decent 0.632***
(0.101)
Observations 176
Source: DG Competition State Aid Scoreboard,
OECD Structural Analysis Databases and OECD
National Accounts. Note: Fixed effects regres-
sion controlling for time effects, initial GDP,
and labour costs. A constant was included.
Table 4: Sectoral aid, decentralisa-
tion and market share
Log(Market share)
Log(SA) 0.167***
(0.063)
Log
2
(SA) -0.011***
(0.004)
Decent -0.153**
(0.05)
SA * Decent 1.22e-05***
(4.48e-06)
Observations 202
Source: DG Competition State Aid Scoreboard,
OECD Patent Statistics and OECD National
Accounts. Note: Fixed effects regression con-
trolling for time effects, initial GDP, and BERD.
A constant was included.
Of course, effectiveness depends
upon the design of industrial
policy, which should target sec-
tors, not particular firms. This in
turn suggests new empirical
studies could be carried out, in
which productivity growth,
patenting, or other measures of
innovativeness and entrepre-
neurship would be regressed
over some measures of sectoral
intervention taking into account
the degree of competition in the
sector, and the extent to which
intervention in each sector is not
concentrated on one single firm,
but rather distributed over a
larger number of firms.
Data showing how much state
aid each sector receives are
unfortunately not available for
EU countries. Thus, to look at the
interaction between state subsi-
dies to a sector, and the level of
product market competition in
that sector, we use Chinese firm-
level panel data. More precisely,
we look at all industrial firms
from the Chinese National Busi-
ness Survey over the 1988-2007
period
7
. Table 6 shows that Total
Factor Productivity (TFP), TFP
growth and product innovation
(defined as the ratio between
output value generated by new
products to total output value)
are all positively correlated with
the interaction between state aid
to the sector and market compe-
tition in the sector.
Thus the more competitive the
recipient sector, the more posi-
tive the effects of state subsidies
to that sector on TFP, TFP growth,
and product innovation in that
sector. In fact, Aghion et al
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7. This is an annual
survey of all firms with
sales of more than 5
million RMB. The survey
contains information on
inputs and outputs,
firm-level state subsi-
dies, and other
variables. Product
market competition is
measured by 1 minus
the Lerner index, which
in turn is calculated as
the ratio of operating
profits minus capital
costs over sales.
8. See our own work on
competition and inno-
vation, for example
Philippe Aghion and
Rachel Griffith (2005)
Competition and
Growth: Reconciling
Theory and Evidence
MIT Press.
RETHINKING INDUSTRIAL POLICY
(2010) show that for sectors
with a low degree of competition,
the effects are negative, whereas
the effects become positive in
sectors with sufficiently high
degrees of competition.
This is important from a policy
standpoint because it indicates
that the controversy between
advocates of competition and
supporters of industrial policy is
misplaced: rather than alterna-
tives, these two policies are
more likely to be complementary.
e Sectoral policy works better
when subsidies are less
concentrated
Finally, regressions by the same
authors show that the interaction
between state aid and product
market competition in the sector
is more positive when state aid is
less concentrated. In fact, if we
restrict our attention to sectors
where state aid is not very con-
centrated (in practice the second
quartile in terms of degree of
concentration of state aid), we
find that state aid has a positive
effect on TFP and product inno-
vation in all sectors with more
than median level of product
market competition.
This result suggests that the
extent to which sectoral state aid
can be growth enhancing
depends significantly on the way
sectoral aid is governed. In par-
ticular, sectoral aid that
enhances within-sector competi-
tion by not focusing on one (or a
small number) of firms, is more
likely to be growth-enhancing
than more concentrated aid.
REDIRECTING EUROPEAN PUBLIC
POLICY
Our findings suggest that the dis-
cussion on the role and
legitimacy of industrial policies
should be revisited by policy-
makers, in particular in the EU.
First, there is a case for sectoral
state aid aimed at redirecting
production and innovation
towards green technologies, or
for policies that target skill-inten-
sive sectors. Second, targeted
state support should not be seen
as antagonistic to competition,
rather it is more likely to be
growth enhancing in the context
of (within-sector) market com-
petition. The question is, what
changes should on this basis be
made to the policy framework?
We do not advocate curbing the
powers of competition authori-
ties. On the contrary, we think
that Europe needs strong EU and
national competition watchdogs
to overrule frequent rent-seeking
leniency on the part of national
governments. It is not by favour-
ing incumbents that Europe will
regain a competitive edge, it is
by stimulating entry and exit and
this is precisely one of the roles
of competition authorities
8
.
Table 6:
Sectoral aid and competition
In TFP
Ratio subsidy ()***
Competition (+)
Interaction (+)***
Source: Estimates from Aghion et al (2010).
Note: The sign of the coefficient is given in
parenthesis. *** indicates significance at 1
percent for the corresponding coefficient. A
constant, as well as fixed and time effect, are
included.
By the same token, however, we
recommend to competition
authorities a more evidence-
based approach. Competition
policy must be based on clear
and uniform legal rules and prin-
ciples but it should also ensure
that decisions are based on an
economic rather than on a purely
legalistic approach. In other
words competition policy should
(i) take better account of the
economic situation of sectors
and the contribution that more
vibrant competition can make to
productivity, innovation and
growth and (ii) take into account
the justification and potential
role of state aid when assessing
if aid should be tolerated.
The European Commission
already recognises the impor-
tance of sectoral focus when
defining its innovation strategy.
The Innovation Union communi-
cation of October 2010
9
said the
Commission would clarify which
forms of innovation can be prop-
erly supported, including for key
enabling technologies and inno-
vations addressing major
societal challenges. What the
Commission calls key enabling
technologies include industrial
biotechnology, nanotechnology,
advanced materials, photonics,
micro- and nano-electronics. In
fact it is speaking of sectors. Sim-
ilarly, the Commissions October
2010 Communication on indus-
trial policy
10
considered
sector-specific initiatives and
listed criteria for the selection of
the corresponding sectors.
Yet, sectoral state aid by member
states is currently perceived by
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9. SEC (2010) 1161.
10. European Commis-
sion (2010) An
integrated industrial
policy for the globalisa-
tion era.
RETHINKING INDUSTRIAL POLICY
European authorities as a threat
to European integration, which
explains the fussy checks by
European competition authori-
ties on all efforts to support
industrial activities. As shown by
Buigues and Sekkat (2011),
there is a general tendency in the
EU towards reducing state aid.
Against this background, our first
conclusion is that the Commis-
sion should become less a priori
biased against the use of state
aid while at the same time set-
ting new and clear guidelines for
the allocation and governance of
that aid. In particular, sectoral
state aid should target skill-
intensive and competitive
sectors and/or be allocated
evenly within the sector, rather
than to one or several pre-
selected firms. Ideally, sectoral
aid should be provided at EU level
using earmarked funding from
the EU budget, as contributions
by individual EU members raise
at least two issues: (i) individual
countries are unlikely to finance
more than a few firms in a sector
where production and/or entry
involves major fixed costs, and
are therefore less likely to recon-
cile industrial policy and
competition policy; in particular
they are more likely to fail exist-
ing dominance criteria; (ii) some
governments may have a bias
against funding production and
entry by foreign-owned firms.
Second, our analysis suggests
that sectoral intervention should
promote competition between
firms for access to public sup-
port, and should not involve
clauses that automatically
favour incumbents. In fact,
depending on the sector and the
fixed costs involved in the corre-
sponding activity, and in order to
preserve competition, sectoral
intervention may need to be car-
ried out at European, national or
regional level, and the firms ben-
efiting from such intervention
may be innovative start-ups,
expanding SMEs, or firms
involved in growing new markets
in developing economies.
Third, European authorities
underestimate the danger of a
specialisation whereby the most
advanced countries focus on
upstream R&D and services,
while outsourcing everything
else to emerging economies. This
has been highlighted by scholars
who praise the German model, in
which public support is given not
only to upstream (laboratory)
research, but also to research
down to the stage of industrial
prototype. Indeed, it is often in
the transition from laboratory to
factory that critical skills for
competitive advantage are
developed, and the development
of these skills also involves sig-
nificant knowledge externalities.
Maintaining a too-restrictive
view of where to allocate
research subsidies might pre-
vent Europe from competing with
other regions or countries that
engage more openly in sectoral
support to manufacturing.
CONCLUSION
In this Policy Brief we have
argued that the debate on cli-
mate change, the recent
financial crisis, and the new
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Bruegel, Rue de la Charit 33, B-1210 Brussels, (+32) 2 227 4210 info@bruegel.org www.bruegel.org
RETHINKING INDUSTRIAL POLICY
Chinese dominance of the world
market, mean there is a need to
revisit the role and design of
industrial policy.
We fully believe in the impor-
tance of product market
competition and trade liberalisa-
tion for fostering innovation and
growth, particularly in the EU
11
.
Our revisiting of the role and
design of industrial policy is
intended to reinforce rather than
mitigate the impact of competi-
tion policy, and to provide
potentially useful guidelines for
EU competition authorities.
First, we have suggested crite-
ria for suitably targeted sectoral
intervention, in particular the
degree of skill-intensity and the
degree of competition within
the sector.
public and private sources.
Finally, we call for a less legal-
istic and more pragmatic,
evidence-based approach
from European competition
authorities when analysing
costs and benefits of sectoral
state aid, and when assessing
the consistency of sectoral
and competition policies.
More generally, the debate
should no longer be for or against
industrial policy, which is being
implemented in any case in one
form or another by many coun-
tries globally
12
. Rather, the issue
should be on how to avoid first
order mistakes through proper
policy design and governance.
The authors are grateful to Gian-
marco Ottaviano and Paul
Seabright for their comments.
11. See our own work on
competition and innova-
tion, for example
Philippe Aghion and
Rachel Griffith (2005)
Competition and Growth:
Reconciling Theory and
Evidence MIT Press.
12. See the Report of the
Spence Growth Commis-
sion (2008), available
at http://www.growth
commission.org/
REFERENCES:
Aghion, Philippe, Mathias Dewatripont, L. Du, Ann Harrison and Patrick Legros (2010) Industrial policy and
competition, Working Paper, Harvard
Aghion, Philippe, Antoine Dechezlepretre, David Hemous, Ralf Martin, and John Van Reenen (2010a) Carbon
taxes, path dependency and directed technical change: evidence from the auto industry, working paper
Aghion, Philippe, Daron Acemoglu, Leonardo Bursztyn and David Hemous (2010b) The environment and
directed technical change, Working Papers 2010.93, Fondazione Eni Enrico Mattei
Aghion, Philippe, Nick Bloom, Richard Blundell, Rachel Griffith and Peter Howitt (2005) Competition and inno-
vation: an inverted-U relationship, The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 701-728
Beck, Thorsten, Asli Demirg-Kunt and Ross Levine (2000) A new database on financial development and
structure, World Bank Economic Review 14, 597-605 (November 2010 update)
Buigues, Pierre-Andr and Khalid Sekkat (2011) Public subsidies to business: an international comparison,
Journal of Industry, Competition and Trade, Springer, vol. 11(1), pages 1-24
Nunn, Nathan and Daniel Trefler (2010) The structure of tariffs and long-term growth, American Economic Jour-
nal: Macroeconomics, American Economic Association, vol. 2(4), pages 158-94
Second, we have argued in
favour of targeted government
intervention to redirect pro-
duction and innovation
towards clean technologies.
Third, we have advocated
proper governance of indus-
trial policy to make it more
competition-friendly and
more innovation-enhancing.
Thus, we have argued that
sectoral state aid should not
favour one particular firm
within a sector, but that sup-
port should be provided on
equal terms to any firm in the
sector in question.
In the same vein, we believe
that industrial policies should
be designed such that proj-
ects that turn out to be
non-performing will not be
refinanced, for example
through co-financing between
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expressed in this publication are those of the author(s) alone.